Revenue recognition is a fundamental component of accrual accounting. Generally accepted accounting principles (GAAP) state that you should recognize revenue when you realize and earn it, which may be earlier or later than when you actually receive cash. Correctly recognizing and deferring revenue enables you to have the most accurate insights into your business profitability and financial health.
Who needs revenue recognition?
Revenue recognition is critical for many types of businesses, especially:
- Public companies or large businesses with over 25 million USD in annual revenue—because they’re legally required to comply with ASC 606 and GAAP and IFRS accounting standards.
- Startups that need to follow accrual accounting to raise money from investors or get a loan from a bank.
- Subscription and service-based businesses.
- Businesses where customers pay up front before receiving a good or service.
Revenue recognition can provide these businesses with a clear picture of their performance.
Revenue recognition gets complicated quickly as businesses scale with larger product lines and increased payment volumes. For subscription businesses that need to manage changes, refunds, disputes, and prorations, revenue recognition can be especially complex. Such subscription updates can complicate the process of recognizing and deferring revenue accurately and compliantly.
New accounting standards
On May 28, 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly issued Accounting Standards Codification (ASC) 606, a new framework for businesses to recognize revenue from contracts with customers.
Stripe Revenue Recognition
Stripe Revenue Recognition helps you simplify the process of recognizing revenue without the need for engineering involvement or lengthy configurations.
- Recognized and deferred revenue summaries at-a-glance
- Downloadable accounting reports and waterfall charts
- Interactive revenue numbers for full audit transparency
- Configurable revenue recognition rules and accounting period controls
Read more about Stripe’s revenue recognition methodology.